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Author: 


Brandeis,  Louis  Dembitz 


Life 

and  the  remedies 

Place: 

Boston 

Date: 

■T!!"!!!!!!!  I  

[ 1 9051 


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Life  insuinnce :  the  abuses  and  the  remedies,  an  address  de- 
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THE'  UBRAMJDSS 


Graduate 
SCHOOL  OF  BUSINESS 
library 


LIFE  INSURANCE:  THE  ABUSES 


AND  THE  REMEDIES 


AN 


DELIVERED  BEFORE  THE 


LOUIS  D.  BRANDEIS 


OF  BOSTON 


COUNSEL  FOR  THE  PROTECTIVE  COMMITTEE  OF  POLICY-HOLDERS 

IN  THE 

EQUITABLE  LIFE  ASSURANCE  SOCIETY 


published  by  the 
Policy-holders  Protective  Committee 
i6i  Devonshire  St.,  Boston,  Mass. 


LIFE  INSURANCE:  THE  ABUSES 
AND  THE  REMEDIES 


AN  ADDRESS 

DELIVERED  BEFORE  THE  COMMERCIAL  CLUB  OF  BOSTON 


BY 

LOUIS  D.  BRANDEIS 

CX)UN8IL  VOE  THB  PROTBCTIVB  COMMITTBB  OF  POLICY-MOLDBKS 
BQUITABLB  LIFB  ASSITRANCB  SOCIBTY 


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>  «     t  •  •  •   >  >' 

I   •      i       »  • 


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,3       >        5     i  » 


S        »     *     •  * 


»  t. 


PUBLISHED  BY  THE 

Policy-holders  Protective  Committee 
t6t  Devonshire  St.,  Boston,  Mass. 


ay 

I  a 

f  LIFE  INSURANCE:  THE  ABUSES 
2  AND  THE  REMEDIES* 


Mk.  Peesident  and  Gbntlembn  : 

Eight  months  ago  dissension  among  guilty  officers  of  the  Equit- 
able Life  Assurance  Society  first  directed  public  attention  to  the 
conduct  of  the  life  insurance  business.  Since  then  the  disclosures 
of  financial  depravity  have  aroused  widespread  indignation;  but 
even  now  the  importance  of  the  subject  is  not  generally  realized. 

OUR  HUGE  LIFE  INSURANCE  INVESTMENT 

On  January  ist,  1905,  there  were  outstanding  in  the  ninety  prin- 
cipal legal  reserve  or  old  line  life  insurance  companies  of  the  United 
States  21,082,352  policies.  By  these  policies  the  lives  of  at  least 
lo,CXX),ocx)  of  our  people  are  insured.  As  these  policies  were  taken 
out  largely  on  the  lives  of  husbands,  intending  to  provide  for  widow 
and  children,  it  Is  estimated  that,  on  the  average,  more  than  four 
people  are  interested  in  each  life  insured.  So  we  have  in  all  about 
40,000,000  people,  or  one-half  of  the  total  population  of  the  United 
States,  directly  interested  in  the  conduct  of  these  ninety  companies. 
The  aggregate  amount  of  insurance  represented  by  these  21,082,352 
policies  was  112,928,493,754.  That  sum  is  more  than  the  actual 
value  of  all  the  steam  railroads  in  the  United  States  which  on  June 
30,  1904,  was  only  $11,244,852,000.  It  is  far  more  than  the  par 
value  of  their  aggregate  bonds  and  stocks  held  by  the  public,  which 

only  *a585,467»7"- 
To  provide  for  that  insurance  these  companies  received  during  the 


*  DcfiTC—d  bdorc  the  Coaunercial  Qub  of  Boston  October  26,  1905. 


year  1904  new  money  in  the  form  of  pFemitims  aggregating  l498»* 
303,279.  That  is,  more  than  the  aggregate  interest  and  dividends 
paid  on  all  bonds  and  stocks  of  our  steam  railroads  held  by  the 
public,  which,  during  the  year  ending  June  30,  1904,  was  only 
1465,872,674. 

On  January  i,  1905,  these  ninety  insurance  companies  held  assets 
aggregating  #2,573,186,639.  That  is,  more  than  three  timet  the 
aggregate  capital  of  all  the  5331  national  banks  in  the  United  States 
reporting  June  30,  1904,  which  was  only  767, 3 7 8, 148.  The  assets 
of  these  insurance  companies  were  nearly  four-fifths  as  large  as 
the  agpegate  deposits  in  all  the  national  banks,  which  were  only 
13,312,439^841. 

The  total  income  of  these  insurance  companies  during  the  year 
1904,  including  returns  from  investments,  was  $6 12,896,887.  That 
is,  more  than  the  total  revenue  of  the  United  States  Government 
from  all  sources  during  the  year  ending  June  30,  1905,  which  was 

only  iuSA^SSSg^H- 

'These  igures,  huge  aS'  they  ^are,  cover  only  a  part  of  the  direct 
interest  of  the  American  people  in  life  insurance.  Besides  these 
ninety  legal  reserve  companies,  there  are  in  the  United  States 
numberless  assessment  companies  and  fraternal  beneficiary  societies 
which  provide  life  insurance.  Their  members  are  mainly  wage- 
'earners  who  cannot  pay  the  high  premiums  exacted  by  the  legal 
reserve  companies. 

But  even  the  legal  reserve  companies  insure  mainly  persons  of 
small  means,  performing  essentially  the  function  of  the  savings 
bank.  The  large  company  advertises  with  pride  its  million 
dollar  policies  ;  but  in  1904  the  average  size  of  the  policy  in  the 
Equitable  was  #2,648;  in  the  Mutual  Life  of  New  York  #2,351 ; 
and  in  the  New  York  Life  only  ^2,076.  In  the  Metropolitan  and 
in  the  Prudential,  which  join  with  the  ordinary  life  insurance  busi- 
ness the  specialty  of  insuring  working  people,  the  average  policy 
is  only  I183  and  I178,  respectively.  It  will  be  seen  therefore  that 
in  spite  of  the  large  policies  held  by  a  few  individuals,  the  life 
insurance  of  this  country  is  in  the  main  held  by  what  we  term 
"the  people"  —  that  large  class  which  every  system  of  business 
and  of  government  should  seek  to  protect. 


THE  OOlltPANiBS'  COmmOL  OP  QUICK  CAPITAL 
Such  is  the  direct  interest  of  our  people  in  the  proper  conduct  of 

the  life  insurance  business  —  the  interest  primarily  of  the  home. 
Indirectly  the  life  insurance  business  affects  our  industrial  and 
political  life  no  less  vitally  and  with  perhaps  even  more  far-reaching 
effects.  That  influence  results  from  the  control  which  the  largest 
life  insurance  companies  exercise  over  our  business  and  our  political 
institutions  by  means  of  the  vast  accumulation  in  a  few  hands  of  the 
assets  held  as  insurance  reserve,  or  for  deferred  dividends  or  surplus. 

The  aggregate  assets  of  these  ninety  legal  reserve  companies  was, 
on  January  i,  1905,  $2,573, 186,639.  Of  that  sum  nearly  one-half,  or 
$  1,247, 33 1,738,  was  held  by  the  three  leading  Wall  Street  com- 
panies, the  Mutual  Life  of  New  York,  the  Equitable  and  the  New 
York  Life,  not  inaptly  referred  to  as  "The  Big  Three"  and  the 
"Racers."  One  billion  two  hundred  and  forty-seven  million  three 
hundred  and  thirty-one  thousand  seven  hundred  and  thirty-eight  dol- 
lars is  a  vast  sum,  but  the  control  exercised  by  these  three  companies 
does  not  lie  mainly  in  the  size  of  the  aggregate  assets.  It  results  from 
their  character  and  from  the  conditions  under  which  the  funds  are  held. 
The  i  1,247,33 1,738  in  assets  held  by  these  three  Wall  Street  com- 
panies is  a  trifling  amount  as  compared  with  the  aggregate  wealth 
of  the  country.  What  gives  to  the  managers  of  these  and  allied 
insurance  companies  the  control  which  they  exercise  over  business  is 
the  fact  that  the  larger  part  of  the  aggregate  assets  is  quick  capital. 
We  have  in  the  United  States  many  other  great  aggregations  of 
assets :  in  manufacturing,  mining  and  commerce,  the  Steel  Trust,  the 
Oil  Trust,  the  Beef  Trust ;  in  transportation,  the  Northern  Pacific- 
Great  Northern  combination,  the  Pennsylvania  system  and  the  New 
York  Central  system.  Even  in  combinations  like  these  our  people 
recognize  a  menace  to  our  welfare  and  our  institutions.  But  between 
the  vast  combinations  of  capital  in  manufacturing  or  transportation 
and  the  accumulation  of  capital  by  the  insurance  companies  there 
is  this  marked  difference— the  capital  of  the  manufacturing,  of  the 
mining,  and  of  the  railroad  companies  is,  in  the  main,  permanently 
invested  in  lands,  buildings  or  machinery,  in  rails,  bridges  or  equip- 
ment, or  it  is  required  for  operating  their  properties.  The  capital  of 
the  life  insuraiice  companies,  on  the  other  hand,  is  mainly  free  capi- 

5 


tml.  Tlie  liitge  nattuficturtiig  md  tniisportatio:ii  companies,  great 
and  pnw  erf  til  as  tliey  are,  are  directly  dependent  for  tlieir  prosperity 
upon  the  prosperity  of  the  country  and  the  service  which  they  ren- 
der from  day  to  day  to  the  people.  Furthermore  they  are  constant 
borrowers. 

The  situation  of  the  life  insurance  'Companies  is  entirely  different, 
fixcepi  in  respect  to  the  growth  of  their  husiness,  they  are  not 
dependent  for  their  prosperity  upon  that  of  the  country.  Indeed, 
they  derive  certain  benefits  in  times  of  adversity.  While  the 
securities  they  already  hold  are  not  of  a  class  to  be  imperilled,  they 
can  purchase  new  securities  to  better  advantage.  They  are  the 
creditors  of  our  great  industries,  with  all  the  power  which  that 
mpties* 

Of  the  aggregate  capital  of  these  three  leading  life  insurance 
companies  there  is  invested  in  real  estate  only  6.8  per  cent.  The 
balance  of  their  assets  is  substantially  quick  capital.  The  larger 
part  of  it  is  invested  in  bonds  and  stocks,  in  collateral  loans  and 
money  ia  bank  Moreover,  these  three  companies— the  Equitable, 
the  Mutual  Life  and  the  New  York  Life— have  in  important 
respects  co-operated  with  each  other. 

OTHER  QUICK  CAPITAL  INSIGNIFICANT 

Compared  with  their  quick  capital,  that  of  the  great  banking 
institutions  of  the  country  is  insignificant.  The  three  greatest  New 
York  banks — the  National  City,  the  Bank  of  Commerce  and  the 
First  National — had  on  September  30,  1905,  in  capital  and  surplus, 
together,  only  1^106,264,800.  They  had,  it  is  true,  in  deposits 
142 1,52  i,90Qi  .an.  aggregate  about  as  large  as  the  assets  of  a  single 
one  of  these  thrm  insurance  conpanies. 

But  over  their  deposits  the  banks  have  only  a  limited  control. 
Twenty-five  per  cent  must  always  be  held  as  a  reserve.  Besides, 
substantially  all  deposits  in  banks  and  trust  companies  are  sub- 
ject to  check  This  right  of  the  depositor  to  call  for  his  money 
places  a  great  restraint  upon  the  use  which  it  is  possible  for  bank 
"ilittiagers  to  make  of  the  funds  under  their  control ;  and  these  insur- 
ance companies  are  probably  the  largest  depositors.  On  September 
30, these  three  insurance  companies  had  deposited  in  banks 

6 


and  trust  companies  #77,132,878.  Such  huge  deposits  secure  to  the 
insurance  conpanies  an  effectual  control  over  the  banking  insritu- 
tions  aside  from  the  actual  control  which  they  hold  through  owner- 
ship of  bank  and  trust  company  stocks. 

The  assets  of  the  life  insurance  companies  are  substantially  in  the 
absolute  control  of  the  managers.  Their  officers  know  (except  as  to 
new  business)  with  mathematical  certainty  approximately  how  much 
money  they  will  be  required  to  pay  out  each  month  for  years  to 
come ;  because  the  whole  insurance  business  rests  upon  stability  in 
average  death  rates.  The  insurance  company  may  use  its  capital 
without  danger  of  its  being  called  by  those  for  whom  it  is  held. 

Furthermore,  the  uniinnt  of  withdrawals  from  the  banks  from 
time  to  time  is  substantially  equal  to  the  deposits ;  whereas  the 
funds  of  these  insurance  companies  are  increasing  at  an  alarming 
rate.  To  these  three  companies  alone  there  was  actually  paid  in 
premiums  and  income  from  investment  in  the  year  1904,  1254,870^- 
44I-37-  Only  1111,161,905.25,  or  43.61  per  cent,  was  paid  out  by 
thep  to  the  policy-holders.  The  balance  (except  $7,000)  was  used 
either  for  expense  or  accumulated  for  the  future.  In  the  four  years 
preceding  January  i,  1905,  the  gross  assets  held  by  these  three 
companies  increased  $353»638,734. 

The  power  of  the  financiers  who  control  these  Wall  Street 
companies  is  further  increased  by  close  alliance  with  other  life 
insurance  companies.  The  largest  of  these  allied  companies -the 
Metropolitan  and  the  Prudential,  on  January  ist,  1905,  had  assets 
aggregating  ^216,659,984,  and  their  rate  of  accumulation  is  even 
greater  than  that  of  the  three  leaders ;  for  the  Metropolitan  and  the 
Prudential  draw  from  a  larger  public,  mainly  from  the  workingmen. 
In  five  years  the  assets  of  these  two  companies  have  more  than 
doubled. 

The  "  Big  Three,"  with  their  lesser  but  powerful  allies,  join 
together  in  syndicates  to  insure  the  financing  of  the  great  manufac- 
turing and  railroad  combinations  and  furnish  the  weapons  for  our 
Napoleons  of  finance.  The  Northern  Securities  Trust,  Morgan's 
attempt  to  perfect  a  monopoly  of  the  railroads  in  the  Northwest ; 
The  International  Mercantile  Marine,  Morgan's  attempt  to  mon' 
opolize  a  large  part  of  the  shipping  of  the  world ;  Harriman's  and 


Gould's  ambitious  plans — are  made  possible  largely  by  the  gathering 
of  the  sa¥iiigs  of  the  people  in  the  treasuries  of  these  five  insurance 
companies.  How  this  financial  community  of  interests  operates  in 
even  the  routine  business  of  the  companies  may  be  seen  from  this : 
The  Equitable  held  on  January  i,  1905,  besides  $1 1,190,006  Govern- 
ment, State,  City  and  County  bonds  and  ^3,708,945  Russian  railroad 
securities  (owned  chiefly  to  comply  with  the  requirements  of  foreign 
governments)  bonds  and  stock  of  the  aggregate  cost  of  $  192,849,29a 
Of  these  securities  I184, 740,473 — ^that  is,  all  but  1*8,108,817  (or  4 
per  cent.)  were  of  corporations  in  which  either  one  or  more  of  the 
directors  of  the  Equitable  were  interested  as  directors  or  which 
were  parts  of  systems  controlled  by  such  corporations. 

When  such  facts  are  considered,  it  becomes  obvious  why  the 
financiers  who  control  these  great  insurance  companies  with  their 
huge  quick  capital  exercise  a  predominating  influence  upon  the 
business  of  the  country.  The  economic  menace  of  past  ages  was 
the  church — the  dead  hand,  which  gradually  acquired  a  large  part  of 
all  available  lands.  The  greatest  economic  menace  of  to-day  it  a 
very  live  hand — ^these  great  insurance  companies  which  .are  con- 
trolling so  large  a  part  of  our  quick  capital. 

now  POWER  BNTRUSTBD  HAS  BEEN  ABUSED   

Such  is  the  power  which  the  American  people  have  CTWusted  to 
the  managers  of  these  large  companies.  How  has  it  been  exercised? 
Substantially  as  all  irresponsible  power  since  the  beginning  of  the 
world:  selfishly,  dishonestly  and  in  the  long  run  inefficiently. 
The  breaches  of  trust  committed  or  permitted  by  men  of  high  finan- 
cial reputation,  the  disclosure  of  the  payment  of  exorbitant  salaries 
and  commissions,  the  illegal  participation  in  syndicate  profits,  the 
persistent  perversion  of  sacred  trust  funds  to  political  purposes,  the 
co-operation  of  the  large  New  York  companies  to  control  the  legis- 
latures of  the  country,  these  disclosures  are  indeed  distressing  ;  but 
the  practice  of  deliberate  and  persistent  deception  of  the  public 
which  the  testimony  discloses,  though  less  dramatic,  is  even  more 
serious.  Talleyrand  said,  "  language  was  made  to  conceal  thought" 
George  W.  Perkins  would  teach  us  that  "  Book-keeping  was  made 
to  conceal  facts."    Consider  for  a  moment  his  situation.    An  im- 


portant member  of  the  most  famous  banking  firm  in  America,  and 
next  to  the  Rothschilds  the  most  famous  in  the  world,  confesses  this : 

The  New  York  Life  company,  of  which  he  is  the  vice-president, 
held  on  December3i,  1903,  an  investment  taken  through  his  firm,  J.  P. 
Morgan  &  Co.,  of  $4,000,000  in  bonds  of  the  International  Mercantile 
Marine.  It  was  a  poor  investment.  It  was  deemed  unwise  to  make 
known  to  the  insurance  departments  and  to  present  and  prospective 
policy-holders  the  fact  that  so  large  an  investment  in  these  un- 
fortunate securities  was  held  by  his  company  (and  doubtless  also 
how  much  they  had  depreciated  in  market  value). 

Perkins,  the  vice  president  of  the  New  York  Life  company,  and 
at  the  same  time  a  member  of  J.  P.  Morgan  &  Co.,  goes  through  the 
form  on  December  31,  1903,  of  selling  #800,000  of  these  bonds  to  his 
firm  at  par,  and  then  on  January  2, 1 904,  re -transferring  the  same  to  the 
insurance  company  at  par  and  interest.  This  was  done  in  order  that 
the  officers  of  the  company  might  under  oath  present  to  the 
insurance  departments  of  the  several  States  and  countries  an  official 
statement  which  would  show  that  the  insurance  company  did  not  at 
the  close  of  the  year  1903  hold  as  many  of  these  bonds  as  was  the 
fact,  and  that  the  value  of  those  held  was  par  [which  was  not 
the  fact]. 

Again,  Perkins  confesses  that  in  order  to  prevent  the  company's 
exclusion  from  Prussia  by  reason  of  holding  among  its  investments 
a  large  amount  of  stocks,  entries  were  made  in  the  books  of  account 
showing  a  sale  of  these  stocks.  The  fact  is  that  the  stocks  were  not 
actually  sold  but  that  their  ownership  was  concealed ;  and  that  in 
order  to  account  on  the  books  for  the  proceeds  of  this  fake  sale,  two 
minor  employees  of  the  company  —  one  of  them  a  colored  messen- 
ger with  a  salary  of  $600  per  year— were  made  to  give  their  notes 
for  l3»357iOOO  with  the  stock  as  collateral  —  and  the  notes  were 
then  represented  among  the  assets.  The  original  purpose  of  this 
elaborate  system  of  fraud  may  have  been  merely  to  deceive  the  Prussian 
Government ;  but  with  a  degree  of  thrift  rare  in  the  management  of 
these  companies,  it  was  used  also  to  deceive  our  own  insurance  com- 
missioners and  the  policyholders.  The  New  York  Life  had  the 
effrontery  up  to  the  time  of  Perkins's  examination,  to  declare  in  exten- 
sive advertising  that  it  held  no  stocks  whatever. 


9 


In  tlie  case  of  cumtnoii  crinitiials  ii  accepiti  it  cnnieation  of 
guilt.  With  financiers  and  business  men  faisiication  of  booki  lias 
hitherto  been  considered  the  strongest  evidence  of  guilt.  Yet 
the  falsification  of  the  books  of  these  companies  has  been  a  persistent 
pfactice.  Secret  ledgers  have  been  opened  in  which  were  entered 
fuestloiiaile  tnvestneiits^  and  tnoft  f uettionaMe  'Cipenditiiret. 
Hundreds  of  thousands  spent  '*for  legislatiire  purposes "  weie 
charged  up  in  real  estate  accounts.  So  elaborate  has  been  the 
system  of  fraudulent  entries  that  after  months  of  investigation  the 
particular  form  of  rascality  embodied  in  the  Equitable's  1^685,000 
liercaiitie  Trust  Company,:  so-called  ''yellow-dof,"  account  has 
not  yet"  been  detect'cd. 

The  degree  of  guilt  involved  in  such  transactions  will  be  appreci- 
ated only  when  one  remembers  that  the  life  insurance  business 
beyond  all  other  in  the  world  rests  upon  confidence — confidence 
Ibat:  in  the  'leiiiot^  indefinite  future  the  present  sacrifiee  of  the 
piicyhoider  wil  bring  prote<3tion  to  uriiow  .and  ohidM. 

IIII0SS  INBPPiaBNCY  IN  MANAIiBnBNT 

But  the  management  of  these  companies  has  been  not  only  selfish 
and  dishonest ;  it  has  also  been  singularly  inefficient ;  and  it  is  by 
tbits  tneii^ctettcy  ti  bat  the  policy-liolders  have  actually  suffered  most. 
The  losaet:  of  'policy*holderi'  through  exorbitant  salaries,  .and  syndicate 
operations,  though  large  in  the  aggregate,  are  small  as  compared 
with  the  loss  from  bad  management.  The  test  of  success  in  the  life 
insurance  business  is  of  course  to  furnish  insurance  of  absolute 
safety  at  the  minimum  cost  The  size  of  a  life  insurance  company 
is  no  eiridence  of  success.  It  is  evidence  id  energy ;  it  is  'Oiridence 
of  business  skill ;  but  the  writing  by  the  Mutual  Life  of  J  1,5/8,93 
833  of  insurance  and  the  control  of  $442,061,529  in  assets  is,  in 
itself,  no  more  evidence  of  success  as  an  insurance  company  than  the 
display  of  a  f  ii^cxjo  rug  in  the  office  of  its  president.  In  life  insur- 
ance, success  is  proved  by  a  small  pro  rata  expense  account,  a  large 
percentage  of  return  upon  absolutely  safe  investments,  and  a  small 
per  cent  of  lapsed  and  surrendered  policies. 

Now  what  is  the  record  of  the  three  largest  life  insurance  companies 
of  the  world  in  this  respect.  ?   Exclusive  of  taxes  and  fees,  the  per- 

10 


centage  of  expense  to  total  premium  income  for  1904  was  this : 
New  York  Life,  22.73^. 
Gquitable,  32.78^. 
Mutual  Life,  24.65^. 

These  expense  percentages  are  appalling ;  and  yet  the  companies 
which  besides  issuing  ordinary  life  policies  make  a  specialty  of 
insuring  the  workingmen  show  an  even  greater  percentage  of 
expense  to  all  premium  receipts,  namely : 

Metropolitan  Life,  37.0956. 

Prudential,  37.285^. 

This  Prudential  Company  which  advertises  itself  as  the  Rock  of 
Gibraltar,  takes  for  its  officers  and  other  management  expenses  on 
the  average  of  all  business  37.28  cents  for  every  dollar  which  the 
policy-holders  deposit  with  it.  On  the  industrial  business,  the 
workingman's  insurance,  the  percentage  taken  is  much  larger.  In 
addition,  the  company  pays  to  stockholders  in  dividends  each  year 
an  equivalent  of  219.78^  on  the  cash  paid  into  the  company  on  the 
capital  stock. 

SAVINGS  BANK5  BY  CONTRAST 

Compare  these  huge  life  insurance  companies'  charges  for  man- 
aging savings  with  the  cost  of  running  the  Massachusetts  savings 
banks.  There  are  in  Massachusetts  188  savings  banks  under  the 
management  of  probably  about  3000  different  individuals  acting  a$ 
trustees  without  compensation.  At  Ihf  close  of  the  financial  year» 
October  31,  1904,  these  banks  held  assets  aggregating  |674,644«- 
990.17,  more  than  half  the  aggregate  held  by  the  three  largest 
life  insurance  companies  of  the  world.  There  had  been  deposited  in 
these  188  savings  banks  during  the  year  ending  October  31,  1904, 
J»  105,466, 148.68,  an  amount  exceeding  half  the  aggregate  of  the 
year's  premiums  of  these  three  companies  (1206,132,511.44).  The 
aggregate  expense  of  taking  care  of  the  business  of  these  188 
savings  banks  for  the  year  1904  was  ^  1,546,904.44,  or  less  than  one- 
thirtieth  of  the  aggregate  expense  of  these  three  insurance  cona- 
panies  (^48, 106,809.00)  for  the  year. 

To  manage  the  i89  Massachusetts  savings  banks  cost  23-100  of 


II 


one  per  cest  of  tlie  avenge  itsets  held  during  tlie  year,  or  but 
1.46  per  cent  of  tlie  yearns  deposits.  To  manage  tlie  tliree  large 
life  insurance  companies  cost  4.03  per  cent,  of  their  aggregate 
average  assets  and  23.33  P^r  cent,  of  the  year's  premium  income. 
That  is,  the  pro  rata  cost  of  taking  care  of  the  savings  invested  in 
these  three  insurance  companies  was  sevmtem  times  as  great  as 
the  expense  of  caring  for  savings  invested  in  our  188  savings  banks. 

Compare  now  the  service  rendered  by  these  two  classes  of  sav- 
ings institutions.  The  high  priced  insurance  managers  with  their 
banking  and  trust  company  adjuncts  and  high  finance  directorates 
earned  for  their  three  companies  during  the  year  1904  the  following 
gross  return  on  investments : 

New  York  Life      -      .      -      -      4.14  per  cent 
Equitable        .....       4.22  " 
Mutual  Life  4^  " 

Average  4.20  " 

The  faithful  treasurers  of  the  188  modest  Massachusetts  savings 
banks,  supervised  mainly  by  obscure  but  conscientious  citizens,  earned 
during  the  year  ending  October  31,  1904,  4.4  per  cent,  on  the  aver- 
age assets.  The  return  earned  by  our  savings  banks  is  thus  five 
per  cent  greater  than  that  of  the  three  insurance  companies,  and 
a  comparison  of  net  returns  is  even  more  favorable  to  the  savings 
banks.  I  do  not  say  that  the  income  returns  of  the  great  companies 
manned  by  the  great  financiers  was  unreasonably  low,  but  merely 
that  the  small  banks  with  their  low  salaried  officers  earned  more. 

LOSS  THROUGH  LAPSED  P0L1C1E5 

The  average  rate  of  dividends  actually  paid  or  credited  to  the 
depositors  in  our  savings  banks  for  the  year  ending  October  31,  1904, 
was  3.75  per  cent,  with  interest  compounded  semi-annually,  and  in 
1904  no  depositor  in  a  Massachusetts  savings  bank  lost  a  dollar  of 
the  principil  deposited.  On  the  other  hand  the  practice  of  the 
insurance  companies  in  relation  to  forfeiture  and  surrender  of  poli- 
cies has  resulted  in  a  large  percentage  of  the  policy-holders  losing  a 
great  part  of  all  they  had  paid  in  premiums. 

The  whole  structure  of  life  insurance  rests  upon  this  postulate: 


12 


while  the  duration  of  life  of  any  individual  is  uncertain,  the  average 
duration  of  the  lives  of  a  large  number  is  certain.  You  cannot  tell 
how  long  any  one  man  of  say  twenty-five  years  will  live,  but  you 
can  say  with  certainty  that  the  average  age  which  any  thousand 
men  of  twenty-five  years  now  living  in  this  country  will  attain  is 
63.81  years,  and  that  on  the  average  they  will  live  five  years  longer 
than  another  thousand  who  are  thirty  years  old.  If  each  of  these 
men  wanted  $1000  insurance  payable  at  death — ^the  annual  premium 
for  each  (aside  from  the  expense  of  management)  is  that  sum,  which 
invested  and  compounded  at  the  rate  which  it  is  assumed  the  invest- 
ment will  pay  (now  taken  as  low  as  3  1-2  per  cent,  or  3  per  cent.), 
will  at  the  end  of  38.81  years  yield  $iOQO.  Now  among  these  1000 
persons  the  number  of  deaths  increases  each  year.  But  under  the 
level  premium  system  practiced  by  the  legal  reserve  companies,  the 
premium  is  always  the  same;  that  is,  in  the  earlier  years  the 
insured  pays  not  only  a  premium  commensurate  with  the  risk  of  the 
year,  but  something  on  account  of  the  greater  risk  of  future  years. 
For  instance,  a  man  at  twenty-five  pays  a  premium  about  twice  that 
which  represents  the  risk  of  his  dying  in  that  year. 

Now,  a  life  insurance  policy  by  its  terms  is  usually  forfeited 
unless  full  premiums  are  paid  for  the  first  three  years.  Forfeited 
policies  are  termed  "  lapsed  "  policies.  The  lapse  of  a  policy  results 
in  total  loss  to  the  insured  of  his  premium  except  for  the  protection 
temporarily  enjoyed.  The  voluntary  surrender  of  a  policy  after 
three  full  years'  premiums  are  paid  results  in  a  loss  of  part  of  the 
premiums  paid — because  the  companies  pay  on  surrender  only  a 
fraction  of  its  actual  legal  reserve  value  {e.g.<,  in  1904  the  Mutual 
Life  paid  on  surrender  only  63.15  per  cent  of  such  value).  Ex- 
perience, especially  in  these  large  companies,  shows  that  the  mor- 
tality of  life  insurance  policies  is  very  much  greater  than  the 
mortality  among  policy-holders.  The  life  of  an  ordinary  life  policy 
is  short,  not  because  life  is  short,  but  because  most  policies  do  not 
come  to  their  natural  termination.  Thus,  in  the  year  1904  the 
policies  in  the  Mutual  Life  which  came  to  a  natural  termination  by 
death,  maturity,  or  expiry,  aggregated  only  9,169  in  number  and 
•  ^28,278,464  in  amount  insured;  while  7,011  policies,  aggregating 


116^896^941  were  siirrendered,  and  33»3IS  policies,  aggregalinf 
i74»9^^54  lapsed. 

Among  the  companies  which  make  a  specialty  of  insuring 
workingmen,  the  mortality  of  the  policies  is  very  much  greater.  In 
1904,  116,894  of  the  Metropolitan  Company's  industrial  policies 
terminated  by  death  and  expiry ;  but  1,225,832  terminated  by  lapse 
and  6i,230  by  surrender;  that  is,  only  one  policy  in  twelve  came  to 
a  natural  end.  In  the  Prudential  Company  the  condition  was  even 
worse.  There  82,963  terminated  by  death  and  expiry  ;  945,640  by 
lapse,  and  45,361  by  surrender ;  that  is,  only  one  policy  in  thirteen 
came  to  a  natural  end. 

W'MV  Hill  ltf*IBC  I  Alfedl 

People  who  take  out  fire  insurance  policies  generally  continue 
the  insurance,  although  a  fire  policy  could  be  dropped  after  the 
term  without  the  insured  losing  anything,  since  the  insured  has  had 
his  full  protection.  But  in  life  insurance,  where  a  large  premium 
is  paid  in  early  years  on  account  of  the  greater  mortality  of  later 
years,  the  policy-holder  who  allows  his  policy  to  lapse  loses  the  reserve 
which  had  accumulated  for  him.  What  is  the  explanation  of  this 
huge  mortality  in  life  insurance  policies?  It  can  be  only  this: 
men  are  induced  to  take  out  life  insurance  by  misrepresentation,  or 
by  promises  which  are  not  realized :  and  the  extravagant  conduct  of 
the  business  renders  the  cost  of  the  life  insurance  so  great  that  the 
insured  cannot  continue  to  carry  it. 

THE  WASTE  IN  SOLICITING 

Consider  how  great  this  expense  of  solicitation  is.  In  the  year' 
1904  the  New  York  life  spent  in  agents'  commissions  11.62  per 
cent,  of  all  premiums  received;  the  Equitable  11. 81  per  cent;  the 
Mutual  Life  of  New  York  13.57  per  cent.;  the  Metropolitan  15.01  per 
cent;  and  the  Prudential  18.98  per  cent.  Note  that  this  is  the  aver- 
age percentage  paid  for  commissions  on  all  policies,  old  and  new. 
The  percentage  on  new  business  is  of  course  much  greater.  The 
Mutual  Life  paid  in  1904  for  commissions  on  new  business  $6,6gir 
016.56  out  of  premiums  aggregating  ^  14,676,65 1.60,  or  45.58  per 
cent,  of  the  year's  premiums  on  new  business.    Yet  those  figures 


14 


present  only  a  part  of  the  expense  of  solicitation.  There  m»  in  the 
next  place,  all  the  advertising.  For  that  the  Mutual  paid  in  1904 
the  greater  part  of  the  amount  charged  to  "advertising,  printing  and 
postage,"  which  amounts  to  ^5 1,1 34,833.76,  or  7.73  per  cent  of  the 
year's  premium  receipts  from  new  business ;  and  besides  this,  there 
is  all  the  office  and  inspection  expense  directly  entailed  by  this 
extensive  solicitation.  The  extent  to  which  solicitation  is  carried 
may  be  inferred  from  the  fact  that  in  the  year  1904,  the  Equitable, 
the  Mutual  Life  and  the  New  York  Life  actually  wrote  102,314  poli- 
cies carrying  an  aggregate  insurance  of  $244,862,421,  which  were  not 
even  taken.  That  is,  the  applicant  did  not  pay  the  first  premium. 
He  was  brought  "to  the  water  "  but  could  not  be  made  "to  drink." 
The  aggregate  expense  of  solicitation  in  these  three  companies  must 
approximate  sixteen  per  cent  of  all  premium  receipts.  When  it  is 
borne  in  mind  how  small  a  part  of  the  policies  come  to  the  natural 
end  of  fruition  to  the  policy-holder,  and  how  great  consequently  is 
the  loss  to  the  policy-holder  from  lapsed  and  surrendered  policies, 
the  extent  of  the  economic  waste  resulting  from  solicitation  as 
practiced  will  be  realized. 

SAVING  THAT  LOSING 

Life  insurance  is  but  a  method  of  saving.  The  savings  banks 
manage  the  funds  until  such  time  as  they  shall  be  demanded  by  the 
depositor — the  insurance  company  ordinarily  until  the  depositor's 
death.  The  savings  bank  pays  back  to  the  depositor  his  deposit 
with  interest  less  the  necessary  expense  of  management.  The 
insurance  company  in  theory  does  the  same.  The  difference  is 
merely  that  the  savings  bank  undertakes  to  repay  to  each  individual 
depositor  the  whole  of  his  deposit  with  interest;  while  the  insurance 
company  undertakes  to  pay  to  those  who  do  not  reach  the  average 
age  more  than  they  have  deposited  (including  interest)  and  to  those 
who  exceed  the  average  age  less  than  they  deposited  (including 
in.terest). 

How  many  wage-earners  would  insure  in  these  companies  if-^they 
were  told  that  for  every  dollar  they  pay,  forty  cents  will  go  to  the 

stockholders',  officers'  and  agents'  salaries,  or  for  other  running 
expenses?    How  many  wage-earners  would  assume  the  burden  of 

IS 


premiums  if  they  knew  that  there  is  but  one  chance  in  twelve  that 
they  will  carry  their  policies  to  maturity  ? 

How  idle  is  the  boast  sometimes  made  by  these  companies  that 
they  have  returned  to  the  policy-holder  the  whole  of  his  premiums. 
It  is  as  if  the  savinp  bank  should  boast  of  returning  to  the  depositor 
all  of  his  deposit  but  without  any  interest.  Such  practically  is  what  the 
Equitable,  the  New  York  Life  and  the  Mutual  Life  do  to-day.  The 
average  expense  of  the  three  companies,  exclusive  of  taxes  and  fees, 
was  4.03  per  cent,  of  their  aggregate  assets,  while  the  average  of 
the  return  of  the  three  companies  on  investments  was  4.2  per  cent. 
It  means  m  plain  English  that  the  company  takes  as  compensation 
for  the  care  of  the  policy-holder's  money,  all  that  that  money  earns. 
Such  were  the  terms  on  which,  during  the  troubled  times  of  the 
Napoleonic  wars,  the  Duke  of  Hesse  entrusted  his  money  to  Meyer 
Amachel  Rothschild,  and  thus  laid  the  foundation  for  what,  at  least 
mtil  'recently,  was  the  world's  greatest  fortune. 


CAUSES  OF  ABUSES-QENBIIAL 

I  have  referred  specifically  to  only  five  of  the  ninety  principal 
American  legal  reserve  companies,  five  which  are  closely  allied 
with  Wall  Street,  which  on  January  i,  1905,  held  56.89  per  cent,  of  the 
aggregate  assets,  and  which  during  the  year  1904  wrote  67.42  per 
cent,  of  all  the  life  insurance  written  by  the  ninety  companies.  Of 
the  remaining  eighty-five,  some  are  doubtless  managed  far  less  effici- 
'  ently  and  quite  as  dishonestly  as  any  of  the  leaders  ;  many  are,  no 
doubt,  managed  with  scrupulous  honesty,  and  some  with  reasonable 
and  comparatively  great  economy ;  but  the  methods  of  conducting 
the  business,  particularly  of  soliciting  new  busmess,  adopted  by  the 
leaders,  is  to  a  greater  or  less  extent,  and  perhaps  necessarily, 
followed  by  the  others  at  the  present  time.  The  existing  evils  are 
not  to  be  explained  by  the  presence  in  office  of  dishonest  or  selfish 
men.  The  causes  which  produce  these  rank  abuses  are  general  in 
their  operation.    The  iagrant  dishonesty  and  selfishness  of  the 

16 


managers  of  the  three  leading  New  York  companies  are  the  result, 

not  the  cause,  of  the  abuses.  Men  of  character  may,  for  a  time, 
protect  other  companies  in  large  part  from  like  abuses,  but  the  main 
cause  of  the  evils  disclosed  lies  in  the  system,  rather  than  in  the 
men. 

It  is  obvious  that  the  American  people  whose  attention  has  once 

been  directed  to  these  abuses  will  not  suffer  them  to  continue  with- 
out some  attempt  at  a  remedy.    What  are  the  remedies  proposed  ? 

FEDERAL  SUPERVISION  NO  REMEDY 

The  most  prominent  is  Federal  supervision.  Under  the  decisions 
rendered  by  the  Supreme  Court  of  the  United  States,  an  act  provid- 
ing for  Federal  supervision  would  appear  to  be  clearly  unconsti- 
tutional. But  it  is  apparently  believed  that  the  Supreme  Court  can 
be  induced  to  reverse  itself.  Senator  Dryden  introduced  on 
February  27,  1905,  the  bill  known  as  No.  7277,  to  which  attention 
is  invited. 

Note  the  provisions  by  which  this  bill  seeks  to  put  an  end  to  the 
intolerable  abuses  which  have  been  disclosed.  An  insurance  com- 
pany authorized  to  do  business  in  the  State  where  organized  may,  by 
filing  a  copy  of  its  charter  and  a  financial  statement  and  depositing 
^100,000  in  securities  with  the  treasurer  of  the  United  States,  secure 
a  United  States  license,  which  will  entitle  it  to  do  business  in  any 
State  unless  and  until  the  license  is  revoked  by  the  Federal  superin- 
tendent for  failure  to  pay  a  judgment,  or  because  the  company  is 
deemed  by  him  unsafe. 

The  bill  omits  very  many  of  the  provisions  which,  for  instance  in 
Massachusetts,  have  been  inserted  for  the  protection  of  the  policy- 
holder ;  it  adds  not  a  single  one  by  which  he  may  be  better  protected. 

But  even  if  the  Federal  law  contained  all  the  provisions  of  the 
best  of  the  State  laws,  will  the  insured  gain  or  lose  by  substituting 
the  supervision  of  one  man  at  Washington  for  the  supervision  of  the 
several  States  ?  Assistant  Attorney  General  Nash  of  Massachusetts, 
in  his  able  argument  against  Federal  supervision,  has  truly  said : 

"The  wisdom,  discretion  and  honesty  composite  in  fifty  States 
and  Territories  are  more  to  be  valued  than  the  excellences  of  one 
person  appointed  at  Washington.    State  supervision  is  good  or  bad. 


according  to  the  merits  of  the  best  of  the  commissioners.  Federal 
supenrisioa  must  be  good  or  bad,  according  to  the  qualities  of  one 
man  who  is  unchecked  by  the  work  of  co-ordinate  officials." 

The  sole  effect  of  a  Federal  law  would  be — ^the  sole  purpose  of 
the  Dryden  bill  must  have  been— to  free  the  companies  from  the 
careful  scrutiny  of  the  commissioners  of  some  of  the  States.  It 
seeks  to  rob  the  State  even  of  the  right  to  protect  its  own  citizens 
from  the  legalized  robbery  to  which  present  insurance  measures  sub- 
ject the  citizens,  for  by  the  terms  of  the  bill  a  Federal  license  would 
secure  the  right  to  do  business  within  the  borders  of  the  State,  re* 
gardless  of  the  State  prohibitions,  free  from  the  State's  protective 
regulations.  With  a  frankness  which  is  unusual — and  an  effrontery 
which  is  common — among  the  insurance  magnates — this  bill  is  intro- 
duced in  the  Senate  by  John  F.  Dryden,  the  president  of  the  Pru- 
iential  Life  Insurance  Company — ^the  company  which  pays  to  stock- 
holders annual  dividends  equivalent  to  219.78  per  cent  for  each 
dollar  paid  in  on  the  stock ;  the  company  which  devotes  itself  main- 
ly to  insuring  the  working  m^  it  an  expense  of  over  37.28  cents  on 
every  dollar  of  premiums  paid  ;  the  company  which,  in  1904,  made 
the  worst  record  of  lapsed  and  surrendered  industrial  policies. 

I 

WHY  DRYDEN  WANTS  WHAT  HE  WANTS 

The  Prudential  Life  Insurance  Company  has  a  special  reason  for 
desiring  to  avoid  State  supervision.  Three  years  ago  the  Massachu- 
setts insurance  commissioner  insisted  that  the  policy-holders  must 
be  protected  from  the  scandalous  financial  relations  between  the 
Prudential  Company  and  its  allied  Fidelity  Trust  Company— from 
schemes  as  dangerous  to  the  interest  of  the  insured  as  any  laid  bare 
by  the  investigations  of  the  Equitable,  the  New  York  Life  and  the 
Mutual  Life. 

Federal  supervision  is  also  advocated  by  Mr.  James  M.  Beck 
(formerly  Assistant  Attorney  General  of  the  United  States),  the 
counsel  for  the  Mutual  Life  Insurance  Company,  and  his  ruam  argu~ 
nent  against  State  supervision  appears  to  be  that  the  companies 
pay,  in  the  aggregate,  for  fees  and  taxes  in  the  several  States 
f  io,ocx),ocx),  which  he  says  is  twice  as  much  as  is  necessary  to  cover 
the  expense  of  proper  supervision.    Ten  million  dollars  is  a  large 

I  a 


sum  in  itself,  but  a  very  small  one  compared  with  the  aggregate 
assets  or  the  aggregate  expense  of  management.  Mr.  Beck's  com* 
pany  paid  in  1904  $1,138,663  in  taxes  and  fees.  Its  management 
expenses  were  $15,517,520,  or  nearly  fourteen  times  as  much.  Our 
Massachusetts  savings  banks  paid  in  the  year  ending  October  31,1 904, 
11,627,794.46  in  taxes  to  this  Commonwealth :  that  is  $80,890.02 
more  than  the  whole  expense  of  management,  which  was  $1,546,- 
904.44. 

Doubtless  the  insurance  departments  of  some  States  are  subjects 
for  just  criticism.  In  many  of  the  States  the  department  is 
inefficient,  in  some  doubtless  corrupt.  But  is  there  anything  in 
our  experience  of  Federal  supervision  of  other  departments  of 
business  which  should  lead  us  to  assume  that  it  will  be  freer  from 
grounds  of  criticism  or  on  the  whole  more  efficient  than  the  best 
insurance  department  of  any  of  the  States }  For  it  must  be  remem- 
bo-ed  that  an  efficient  supervision  by  the  department  of  any  State 
will  in  effect  protect  all  the  policy-holders  of  the  company  wherever 
they  may  reside.  Let  us  remember  rather  the  ineffectiveness  for 
eighteen  long  years  of  the  Interstate  Commerce  Commission  to 
deal  with  railroad  abuses,  the  futile  investigation  by  Commissioner 
Garfield  of  the  Beef  Trust,  and  the  unfinished  investigation  into 
the  affairs  of  the  Oil  Trust  in  which  he  has  since  been  engaged. 
Federal  supervision  would  serve  only  to  centralize  still  further  the 
power  of  our  Government  and  to  increase  still  further  the  powers 
of  the  corporations.  Supervision  alone  —  whether  State  or  Fed- 
eral —  will  not  suffice  to  correct  existing  abuses  in  the  life  insurance 
business. 

PUNDAMBNTAL  CHANOfiS  NBCBSSARY 

In  order  to  get  rid  of  the  abuses,  the  measures  to  be  applied  must 
be  radical  and  comprehensive.  The  changes  must  be  fundamental. 
They  are,  in  my  opinion,  these  : 

INSURANCB  ONLY  A  flBTHOD  OP  SAVINO 

First  The  recognition  of  the  true  nature  of  the  life  insurance 
business :  namely,  that  its  sole  province  is  to  manage  temporarily 
with  absolute  safety  and  at  a  minimum  cost  the  savings  of  the 
people  deposited  to  make  appropriate  provision  in  case  of  death,  and 

19 


thill  since  its  pr0¥iiice  is  mainly  to  aid  persons  of  small  means,  it 
should  be  conducted  as  a  beneicent,  not  as  a  monej*making^ 
institution. 

DEFERRED  DIVIDENDS-THB  BLIND  POOL 

Sm:md  The  issuance  of  deferred  dividend  policies  should  be 
discontinued.  Tkm  legitimate  business  of  a  life  insurance  company 
is  to  insure  the  life  of  the  individual  and  to  issue  life  annuities. 
It  should  not  be  used  as  an  investment  company  or  as  a  means  of 
gambling  on  the  misfortunes  of  others.  The  deferred  dividend 
policy  with  its  semi-tontine  provision  is  open  to  these  objections  and 
to  others. 

The  premium  in  life  insurance  is  ordinarily  computed  on  a  higher 
death  rate  than  actually  prevails,  and  a  lower  return  upon 
investment  than  is  actually  earned.  The  profits  from  these  and 
other  sources,  unless  consumed  by  excessive  expenses  or 
accumulated  as  surplus  are  commonly  payable  as  dividends  to  the 
policy-holder  either  in  cash  or  in  reduction  of  future  premiums. 
Under  the  deferred  semi-tontine  dividend  policy  the  dividends  are 
not  paid  over  annually  to  each  policyholder,  but  are  accumulated  for 
long  periods  and  the  accumulated  funds  distributed,  so  far  as  paid 
out  at  all,  among  the  surviving  policyholders  of  a  particular  class. 

The  dividends  thus  accumulated  form  an  appreciable  part  of 
the  huge  funds  controlled  by  the  companies.  Thus  of  the 
$442,061,529.16  assets  held  on  January  i,  1905,  by  the  Mutual  Life, 
1171,539,311.70  consisted  of  what  is  called  "contingent  guaranty 
fund"  and  what  is  really  deferred  dividends.  Of  the  $412,438,381 
of  the  assets  of  the  Equitable,  it  held  J^3»8cx)^00Q,  which  it 
included  under  the  term  "  surplus  "  but  which  was  in  fact  deferred 
dividends.  The  retention  of  these  funds  increases  unnecessarily 
the  control  of  quick  capital  incident  to  a  large  business.  It 
promotes  also  other  evils.  It  tends  to  extravagance  and  inefficient 
management  because  it  removes  the  protection  which  flows  from 
the  annual  accounting.  The  annual  dividend,  the  best  practical 
test  of  the  efficiency  of  the  management,  is  thereby  denied  to  the 
policy-holders. 

The  managers  control  as  a  "blind  pool"  this  huge  fund  not 


20 


required  as  an  insurance  reserve.  They  may  with  impunity  and 
without  discovery  make  inroads  upon  it  to  cover  up  extravagance, 
dishonesty,  or  the  results  of  inefficient  management. 

LAVISH  COMMISSIONS  AND  ADVERTISINO  DEVICES 

TMrd,  Lavish  payments  for  solicitors*  and  agents*  commissions 
and  for  advertising  devices  should  be  discontinued.  Such  practices, 
common  among  the  promoters  of  mining  enterprises  and  of  patents, 
have  no  place  in  the  business  of  life  insurance.  Savings  banks  have 
no  solicitors.  The  life  insuring  habit  is  well  established.  The 
three  million  people  in  Massachusetts  hold  in  the  thirty-three  legal 
reserve  companies  doing  business  in  the  Commonwealth  i,337i795 
life  insurance  policies,  and  have  only  1,766,614  deposit  accounts  in 
our  savings  banks.  The  people  of  the  whole  United  States  hold  one 
such  policy  for  ev^ry  four  persons.  Undoubtedly  many  a  man  has 
been  led  by  the  solicitor's  persistence  and  eloquence  to  make  a 
thrifty  provision  for  his  family.  No  doubt  also  the  savings  bank 
deposits  would  be  swelled  by  similar  exhortation.  But  can  such 
missionary  work  be  justified  at  an  expense  of  twelve  to  twenty  per 
cent  of  all  premiums  paid,  when  the  record  of  lapsed  policies  shows 
that  the  conversion  to  that  thrift  is  but  temporary  ?  In  the  year 
1903  the  Metropolitan  wrote  1,788,828  industrial  policies ;  in  the 
year  1904  1,223,832  of  its  industrial  policies  lapsed.  In  the  year 
1903  the  Prudential  Company  wrote  1,468,230  industrial  policies  ;  in 
the  year  1904,  945,640  of  its  industrial  policies  lapsed.  No  one 
should  be  induced  to  take  out  a  policy  when  the  burden  is  greater 
than  he  can  carry,  or  if  for  other  reasons  it  is  not  for  his  interest  to 
do  so.  The  intelligent  agent  with  the  knowledge  and  a  recognition 
of  the  proper  function  of  the  life  insurance  business,  and  receiving 
a  modest  compensation,  has  still  an  economic  justification.  Many 
men  need  the  impetus  to  thrift,  since  wisdom  often  lags  far  in 
the  rear  of  intelligence;  but  as  the  business  is  now  conducted, 
money  paid  by  the  insured  as  a  result  of  solicitation  is  in  the  main 
wasted.  The  existing  abuse  is  not  that  the  solicitor  earns  too  much, 
but  that  his  occupation  as  pursued  is  economically  unjustified. 

NO  PORPBrrURB  OP  POUaBS 

'     Fourth,    The  forfeiture  of  policies  should  be  prohibited.  Under 


31 


tie  level  preiniiiii  system  eireiyone  pays  etcli  yetr  mme  thm  It 
raiitlral  for  the  protectlcm  of  tlie  single  year,  iie  pays  something 
on  iccounl  of  f utum  years.  That  something  onght  in  every  case  to  be 
preserved  for  the  insured.  The  excuse  offered  by  the  companies  for 
lapsing  is  the  great  initial  expense  of  writing  insurance,  and  that 
arises  mainly  from  the  extravagant  commlssiotts  paid  to  agents  and 
for  lavish  advertising.  With  the  suggested  chaise  of  method  m 
soMdtimg,  no  extraordinary  expense  wonld  be  involved  in  writing 
insurance  except  the  fee  for  medical  examination,  and  that  should  be 
paid  by  the  applicant  as  an  initiation  fee.  The  insured  should  know 
when  he  enters  upon  the  investment  what  the  initial  cost  is. 

STAMMIKD  Wmm  OP  POLICY 

Fi/tk,  Standard  forms  of  policy  should  be  prescribed  ly  law. 
This  would  go  far  toward  preventing  deception.  By  simplifying  and 
standardixing  the  contracts,  In  connection  with  compulsory  annual 
dividends,  tie  insured  would  be  enabled  to  compare  results  in  the 
several  companies.  To-day  such  a  comparison  is  practically  im- 
possible. The  Equitable  has  outstanding  at  least  224  different  forms 
of  policy;  the  New  York  Life  316;  the  Mutual  Life  22a  Stand- 
ardiiing  policies  would  also  much  reduce  tie  work  (and  ienoe  tie 
expense)  of  tie  iusinesa 

TUB  RESTRICTION  OP  INVESTMENTS 

Sixt^,  The  investment  of  the  company's  funds  should  he  sur- 
rounded by  safeguards  similar  to  those  adopted  in  the  case  of  savings 
hanks.  This  would  secure  safety.  This  would  also  go  far  in 
preventing  the  use  of  funds  in  speculative  enterprises,  or  to  advance 
private  interests,  and  greatly  limit  the  possibility  of  the  companies 
engaging  in  syndicate  operations.  Investment  should  not  be  made 
in  the  securities  of  corporations  in  wiici  any  executive  officer  or 
member  of  the  investment  committee  of  the  insurance  company  is 

TRBASin^Y  SAPEQUARDS 

Seventh.  Further  to  protect  the  funds  of  the  companies  and  to 
prevent  their  being  used  directly  or  indirectly  to  advance  the  private 
or  other  interests  of  officers,  provision  should  be  made  to  prohibit 
the  executive  officers  from  engaging  in  any  other  business  or  holding 

22 


I  "I   ■    nil   1 1  I  iiimi  iiimiiiii 


office  in  any  other  business  corporations.  Treasury  safeguards 
also  should  be  adopted  to  prevent  payments  without  properly 
authorized  warrants. 

ACCOUNTINQ  AND  PUBLICITY 

Eighth,  Methods  of  accounting  should  be  introduced  which 
would  compel  the  entry  of  all  transactions  in  a  single  prescribed  set 
of  books,  and  the  submission  to  the  directors  at  air  meetings  of 
reports  showing  in  detail  the  condition  and  the  operations  of  the 
company.  In  such  reports  the  cost  of  every  department  of  the 
business  and  every  kind  of  business  transacted  should  be  clearly 
determined  and  disclosed,  and  likewise  the  condition,  character,  and 
result  of  each  investment.  Publicity  as  to  the  policy-holders  also  is 
essential  to  insure  the  proper  conduct  of  the  business  by  officers 
and  directors. 

DillBCroRS  WHO  DfRBCT 

Ninth.  The  board  of  directors  must  be  composed  of  men  who 
recognize  the  proper  function  of  life  insurance  companies,  and  who, 
like  the  trustees  of  our  savings  banks,  recognize  the  sacred  trust 
involved  in  their  control ;  men  who  are  willing  to  give  to  the 
companies  the  time  and  attention  required  for  the  proper  perform- 
ance of  a  director's  duty ;  men  who  having  the  sole  responsibility 
for  the  management  of  the  company  will  not  delegate  to  the  executive 
officers  or  committees  powers  which  the  board  alone  should  exercise. 

Such  comprehensive  and  fundamental  changes  must  be  made  if 
existing  abuses  are  to  be  eradicated ;  but  even  they  will  not  prove 
effective  to  protect  the  insured  and  the  community  unless  in 
addition : 

THB  size  OP  THE  COMPANY  BE  UMITBD 

Tenth,  A  limit  must  be  placed  upon  the  size  of  the  company.  A 
company  may  of  course  be  too  small  to  be  a  safe  or  an  efficient  and 
economical  unit,  but  it  is  clearly  in  the  interest  of  the  insured  that 
the  company  be  not  allowed  to  expand  beyond  the  point  of  greatest 
efficiency.  It  is  clearly  in  the  interest  of  the  whole  people  that  it 
be  not  allowed  to  expand  beyond  the  point  of  danger  arising  from 
concentration  of  quick  capital  in  the  hands  of  a  few  individuals. 


Tbe  constitutional  right  to  so  limit  the  size  of  insurance  companies 
is  mdisptited. 

Thioiigliout  the  early  years  of  our  history  the  danger  inherent  in 
corporate  control  was  so  well  understood  that  in  every  State  limits 
were  placed  upon  the  amount  of  the  authorized  capital  of  corpora- 
tions of  various  kinds.  The  fear  of  the  power  of  large  banking  and 
industrial  combinations  was  then  general.  Under  infiuences,  not 
always  creditable,  and  under  the  leadership  oi  New  Jersey,  that 
limit  upon  the  amount  of  capital  of  corporations  has  been  in  many 
States  removed.  Now  corporations  with  huge  capital  are  allowed  to 
exist  almost  everywhere  for  almost  any  purpose.  Having  created 
them  we  try  ineffectually  to  check  their  operations  by  anti-trust 
laws.  We  have  tolerated  these  monster  manufacturing  and  mining 
companies  and  the  great  railroad  corporations  mainly  because  it  is 
believed  that  somehow,  through  consolidation,  the  public  may  be 
better  served.  But  whatever  may  be  true  in  other  fields  of  business 
it  has  been  proved  beyond  doubt  thai  in  life  insurance  mere  increase 
in  size  does  not  tend  to  lessen  cost  of  management  or  to  increase 
returns  from  investment ;  that  the  largest  companies  are  unable  to 
serve  the  public  as  well  as  smaller  institutions.  It  has  also  been 
shown  conclusively  that  many  of  the  abuses  in  the  life  insurance 
business,  now  disclosed,  result  directly  from  the  size  of  the  compa- 
nies. Man  has  not  kept  pace  in  growth  with  his  works.  Even  the 
cuccntives  of  the  "Big  Three"  have  admitted  their  inability  ade- 
quately to  supervise  their  companies.  Perkins  and  other  witnesses 
have  sought  to  excuse  illegitimate  syndicate  transactions  and  specu- 
lative underwritings  by  the  necessities  of  investing  the  huge  sums 
pouring  into  the  large  companies.  On  the  other  hand  the  investi- 
gation has  also  made  clear  that  these  large  insurance  companies 
through  the  power  which  inheres  in  the  control  of  quick  capital 
expose  the  community  to  dangers  which  no  otier  kind  of  corpora- 
tion presents  to  so  great  an  extent. 

To  eradicate  abuses— to  protect  the  community— therefore,  it  is 
essential  that  the  insuring  unit  be  kept  relatively  small  You  must 
limit  the  amount  of  premiums  which  it  may  receive,  and  the  assets 
which  it  may  hold— as  well  as  the  scope  and  methods  of  the 
business. 


These  in  general  are  the  remedies  which  in  my  opinion  must  be 
adopted  to  avoid  the  abuses  incident  to  the  life  insurance  business 
as  now  conducted. 

THE  INEVITABLE  ALTERNATIVE 

What  is  the  alternative  ?  Not  the  discontinuance  or  substantial 
reduction  of  life  insurance ;  for  life  insurance  has  become  a  prime 
necessity.  Not  the  continuance  of  the  present  abuses  ;  for  the  out- 
raged and  enlightened  public  opinion  will  no  longer  tolerate  them. 
If  our  people  cannot  secure  life  insurance  at  a  proper  cost  and 
through  private  agencies  which  deal  fairly  with  them,  or  if  they 
cannot  procure  it  through  private  agencies  except  at  the  price  of 
erecting  financial  monsters  which  dominate  the  business  world  and 
corrupt  our  political  institutions,  they  will  discard  the  private 
agency  and  resort  to  State  insurance. 

Despite  your  or  my  protest,  the  extension  of  Government  activity 
into  fields  now  occupied  by  private  business  is  urged  on  every  side. 
Of  all  services  which  the  commuity  requires,  there  is  none  in 
which  the  State  could  more  easily  engage  than  that  of  insuring  the 
lives  of  its  citizens.  Stripped  of  the  mysteries  with  which  it  has 
been  surrounded,  and  the  misleading  devices  by  which  it  has  been 
permeated,  the  business  of  life  insurance  is  one  of  extraordinary 
simplicity.  To  conduct  it  successfully  requires  neither  energy  nor 
initiative,  and  if  pursued  by  the  State  does  not  even  call  for  the 
exercise  of  any  high  degree  of  business  judgment.  The  sole  requisites 
would  be  honesty,  accuracy  and  economy. 

The  business  of  life  insurance,  which  the  companies  now  make  so 
incomprehensible  to  the  insured,  consists  properly  only  of  three 
elements : 

I.    The  initial  medical  examination. 

a.  The  calculation  of  the  so-called  net  premium  or  insurance  and 
mortality  reserve. 

3.    The  investment  of  funds. 

The  first  is  the  province  of  the  physician;  the  second  a  mere 
matter  of  arithmetic  worked  out  by  the  actuary  and  now  actually 
performed  in  large  part  also  by  our  insurance  departments  as  a 
necessary  incident  of  their  supervision ;  the  third,  the  proper  invest- 

«5 


ment  of  funds,  would  ordinarily  require  a  high  degree  of  judgment. 
But  if  the  business  were  conducted  by  the  State,  the  proper  invest- 
ment of  funds  would  not,  at  least  in  Massachusetts,  present  any 
difficiilty.  The  State  and  municipal  loans  would  take  up  all 
ance  reserve.  The  net  indebtedness  of  the  Commonwealth  on 
December  31,  1904,  was  $74,335,130.12,  that  of  our  cities  and  towns 
15141,658,601.  This  aggregate  of  ^215,993,731.11,  presents  a  fund 
far  greater  than  is  required  as  the  legal  reserve  for  all  the  policies 
now  outstanding  in  this  Commonwealth.  The  net  value  of  all  out- 
standing legal  reserve  life  insurance  in  Massachusetts  on  January  i, 
1905,  was  only  <>  122,727,918.  The  aggregate  premiums  paid  in 
Massachusetts  during  the  three  years  ending  January  i,  1905,  to 
the  thirty-three  old  line  companies  was  $79,033,991  ;  but  the 
increase  during  those  years  of  legal  reserve  requirement  was 
only  #23,1221089.  The  increase  of  the  net  State  debt  and  of  the 
gross  mnnicipfil  debt  during  those  years  aggregated  134,798,132.74. 
If  the  State  had  done  this  life  insurance  business,  the  three 
years'  increase  of  legal  reserve  would  not  have  sufficed  to  meet  the 
increased  borrowings  of  the  State  and  the  municipalities.  In  Massa> 
chusetts  at  least,  a  safe  investment  for  our  insurance  funds  would 
thus  be  assured. 

The  net  return  from  such  investment  of  the  funds  by  the  State 
would  compare  not  unfavorably  with  that  now  received  by  the  lead- 
ing insurance  companies.  It  is  true  that  the  interest  return  on 
Massachusetts  State  and  municipal  bonds  is  less  than  the  present 
average  return,  of  the  life  insurance  €om.panies  on  investments ;  but 
that  return  in  case  of  State  insurance  would  be  net.  There  would, 
as  to  the  reserve  funds,  be  no  expense  of  management.  Further- 
more the  investment  return  of  the  insurance  companies  is  being 
almost  steadily  reduced,  and  the  insurance  reserve  on  new  business 
is  being  calculated  on  the  basis  of  3  1-2  or  3  per  cent,  which  is  as 
low  as  the  avenige  return  on  State  and  municipal  bonds. 


^•1 


STATE  INSURANCe  UNDBSIRABLB 

In  my  opinion  the  extension  of  the  functions  of  the  State  to  life 
insurance  is  at  the  present  time  highly  undesirable.  Our  Govern- 
ment  does  not  jet  grapple  successfully  with  the  duties  which  it  has 


4 

I  7« 


assumed,  and  should  not  extend  its  operations  at  least  until  it  does. 

But  whatever  and  however  strong  our  conviction  against  the  exten- 
sion of  governmental  functions  may  be,  we  shall  inevitably  be  swept 
farther  toward  socialism  unless  we  can  curb  the  excesses  of  our 
inandal  magnates.  The  talk  of  the  agitator  alone  does  not  advance 
socialism  a  step ;  but  the  formation  of  great  trusts — the  huge  rail- 
road consolidations — the  insurance  "racers"  with  the  attendant 
rapacity  or  the  dishonesty  of  their  potent  managers,  and  their  frequent 
corruption  of  councils  and  legislatures  is  hastening  us  almost  irres- 
istibly into  socialistic  measures.  The  great  captains  of  industry  and 
of  finance,  who  profess  the  greatest  horror  of  the  extension  of  gov- 
ernmental functions,  are  the  chief  makers  of  socialism.  Socialistic 
thinkers  smile  approvingly  at  the  operations  of  Morgan,  Perkins  and 
Rockefeller,  and  of  the  Hydes,  McCalls,  and  McCurdys.  They  see 
approaching  the  glad  day  when  monopoly  shall  have  brought  all  in- 
dustry and  finance  under  a  single  head,  so  that  with  the  cutting  of  a 
single  neck,  as  Nero  vainly  wished  for  his  Christian  subjects, 
destruction  of  the  enemy  may  be  accomplished.  Our  great  trust- 
building,  trust-abusing  capitalists  have  in  their  selfish  shortsighted- 
ness become  the  makers  of  socialism,  proclaiming  by  their  acts,  like 
the  nobles  of  France,  "After  us,  the  Deluge!" 


•1 


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